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Europe urgently must slender the productiveness hole with the US or danger dropping out on extra development, based on the top of Sweden’s central financial institution.
Erik Thedéen, governor of the Riksbank, advised the Monetary Occasions that Sweden’s financial system had executed higher than the Eurozone previously six years however lagged behind the US, largely attributable to worse productiveness development.
“They are outperforming Europe, including Sweden — the productivity growth in the US has been much stronger. That is very important for European policymakers to try to address,” he mentioned.
Thedéen’s feedback will gasoline the rising debate about how Europe can increase its competitiveness in opposition to rivals such because the US and China. Since 2000, productiveness, as measured by actual output per hour labored, has elevated within the Eurozone and Sweden by nearly 20 per cent and 35 per cent respectively, however has soared by nearly 60 per cent within the US.
The Riksbank on Wednesday added to Europe’s rising divergence on financial coverage from the US because it reduce rates of interest for the primary time in eight years, trimming borrowing prices to three.75 per cent.
The Federal Reserve indicated final week that US rates of interest would stay increased for longer, with its first reduce delayed till the second half of the yr on the earliest. The European Central Financial institution, nevertheless, has signalled it’s more likely to begin reducing at its June assembly.
However whereas Europe weighs the financial affect of reducing charges earlier than the Fed, the big productiveness hole with the US is an rising concern for the continent’s enterprise executives and policymakers.
Nicolai Tangen, head of Norway’s $1.6tn oil fund, advised the FT that Europe was much less formidable, much less hard-working and extra risk-averse than the US.
Enhancements in productiveness are seen as significantly necessary in Norway, Sweden and Denmark to keep up Scandinavia’s excessive wages and strong development. However the nations have applied few profitable coverage proposals to reverse the autumn in productiveness development for the reason that 2008 international monetary disaster.
Thedéen mentioned an unexpectedly robust US financial system may current an even bigger aggressive problem to Sweden than strain on its krona foreign money as a result of it could widen the productiveness and development hole that already exists between the 2 nations.
A stronger financial system “could be more [of a concern] for the Swedish economy than the exchange rate”, he added. Some economists have recommended {that a} weaker krona might frustrate plans to chop charges within the EU member state twice extra this yr.
The Riksbank’s financial coverage has typically assumed an outsized significance in international central banking circles. As one of many first central banks to lift charges after the monetary disaster, it was accused by Nobel-winning economist Paul Krugman of “sadomonetarism”. Its tightening cycle was seen by the Fed, which held rates of interest in the identical interval, as a cautionary story when Sweden suffered years of deflation.
Thedéen, who started his time period as Riksbank governor final yr after being head of Sweden’s monetary regulator from 2015 till 2022, mentioned there was no “institutional memory” from that interval influencing present financial coverage, including that the Riksbank was merely attempting to “make the best possible assessment” of the present circumstances.
The Riksbank had discovered from a failure to anticipate the consequences of the sudden rise in power costs in 2022, when Russia reduce gasoline provides within the wake of its full-scale invasion of Ukraine, he mentioned. Central banks had been criticised for being too gradual to lift charges as inflation soared.
There had already been “indications from the US” of rising power costs feeding increased inflation, so he had discovered “not to underestimate the effects on the world economy if something happens in the world’s largest economy”.
Thedéen mentioned a slight delay in Fed price cuts would “probably not be a big thing for us or the global economy”, however the Riksbank can be involved if the US continued its robust financial efficiency and the Fed was compelled to additional postpone an easing in financial coverage.
However he burdened that each one central banks had been depending on the alerts coming from their friends.
“This time,” he mentioned, “it happens that we cut before the Fed. [But] who knows? Maybe next time it will be the other way around”.
